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Madras Cements: Interest costs take toll - Views on News from Equitymaster
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Madras Cements: Interest costs take toll
Feb 10, 2009

Performance summary
  • Topline grows by 20% YoY during 3QFY09 led by robust growth in volumes and realisations.
  • Operating profits decline by 17% YoY as costs grow at a faster pace than topline growth.
  • Net profit declines by 43% YoY. Apart from the poor show at the operating level, higher interest costs and depreciation charges drag down profitability.


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 5,098 6,092 19.5% 14,769 18,885 27.9%
Expenditure 3,192 4,511 41.3% 8,890 12,792 43.9%
Operating profit (EBITDA) 1,906 1,581 -17.1% 5,879 6,093 3.6%
EBITDA margin 37.4% 26.0%   39.8% 32.3%  
Other income 20 37 83.1% 68 106 56.2%
Interest 81 301 273.9% 242 801 231.3%
Depreciation 225 361 60.8% 721 986 36.8%
Profit before tax/(loss) 1,621 955 -41.1% 4,985 4,412 -11.5%
Tax 515 328 -36.3% 1,664 1,510 -9.3%
Profit after tax/(loss) 1,107 627 -43.3% 3,321 2,903 -12.6%
Net margin 21.7% 10.3%   22.5% 15.4%  
No of shares (m)**       12.1 238.0  
Diluted EPS (Rs)*         15.4  
P/E (times)         4.3  
*trailing twelve month earnings

**In 2QFY09, no of shares have been adjusted for sub-division of equity shares of Rs 10 each into 10 equity shares of Rs 1 each and issue of bonus shares in the ratio of 1:1.

What has driven performance in 3QFY09?
  • Madras Cements does not publish volume numbers and hence it is difficult to comment on the same. However, the double digit 20% YoY growth in topline must have come in on account of growth in volumes and realizations. Also for the nine months ended December 2008, the company has reported 28% YoY growth in topline. Madras Cements being a major player in the southern region must have benefited from the favourable demand scenario witnessed in there. The southern region has witnessed over 10% YoY growth in demand during 9mFY09.

    Cost break-up
    (% of net sales) 3QFY08 3QFY09 9mFY08 9mFY09
    Raw material consumed 12.5% 12.5% 11.9% 12.9%
    Staff costs 4.7% 4.9% 4.0% 4.3%
    Power & Fuel 20.9% 28.1% 19.0% 24.0%
    Transportation & handling 13.4% 16.7% 13.6% 14.8%
    Other expenditure 11.2% 11.9% 11.6% 11.7%

  • The higher input costs such as fuel prices continued to pressurise operating margins of the company that declined by 11% YoY during 3QFY09. The higher crude prices that pushed up prices of petroleum products boosted power and fuel costs and transportation and handling charges. Otherwise on a percentage of sales basis, the company was able to control other cost heads. The crude prices cooled off towards the end of CY08. The benefit of the same is expected to be reflected 4QFY09 onwards as companies choose to clear out earlier inventory first.

  • Net profits declined at a steeper rate of 43% YoY during 3QFY09 as compared to the 17% YoY fall in operating profits. Apart from the poor performance at the operating level, further damage was caused by more than three-fold growth in interest expenses and higher depreciation charges.

What to expect?
In FY08, the company expanded its installed capacity by 2 MTPA to almost 8 MTPA. The company is now progressing with another 2 MTPA cement capacity expansion near Ariyalur. The project also includes installing wind electric generators for an aggregate capacity of 74 MW. Taking into account planned capital investments and factoring maintenance capex that would be needed, the company would spend approximately Rs 15 bn.

The outlined expansion plans would not only help Madras Cements cater to the increasing demand for the commodity but will also help the company sustain its market share. While this is a positive from a long-term perspective, in the medium term the company is expected to witness pressure on margins on account of higher interest and depreciation costs. Further, as the planned capacities become operational, the high realisations witnessed at present are not likely to be sustained. At the current price of Rs 66, the stock is fairly valued at an EV/ton of over Rs 3,100 as per our FY11 estimates.

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